Interest rate surprises and surging restaurants fuel net lease market

The quality of tenant and the length of the lease. That’s what investors are looking for when sinking their dollars into net lease retail properties.

This makes sense. The retail sector continues to face challenges from ecommerce. The old brands that once dominated are struggling. The ones that are surviving are those that have found a way to combine bricks-and-mortar locations with a strong online presence or who offer consumers something that they can’t find online.

That is one of the big takeaways from the second quarter Net Lease Market Report recently released by Wilmette, Illinois-based The Boulder Group.

You can hear the president of The Boulder Group, Randy Blankstein, share his insights on the net lease market during REjournals’ and Midwest Real Estate News’ Net Lease Summit held July 25 at the University Club of Chicago in Chicago. The event, which runs from 8:15 a.m. until 3:30 p.m., brings the biggest names in the net lease, sale leaseback and 1031 Exchange markets, all ready to share their thoughts on the strength of this commercial segment.

Blankstein spoke to Midwest Real Estate News about this very topic this week. He said that the fortunes of the net lease market today are connected to interest rates, which aren’t as high today as people once predicted. This is good news for sellers. If you’re a buyer? It makes investing in the net lease space a bit more expensive.

“The expectation was that we’d have higher interest rates by now. Investors were holding back a bit. Now, though, they are realize that pricing might get worse for them. So buyers are now thinking that they better go after this market before that happens,” Blankstein said.

The expectations for this year, of course, were that interest rates were going to be higher. Because of this, cap rates would be up. This, though, hasn’t played out. Interest rates are stable now, Blankstein said. But no one knows whether they’ll rise or fall. This, then, is inspiring more buyers to enter the net lease space now, before assets become even more expensive.

“I think the interest rates are surprising to 80 to 90 percent of the people. Most everyone is surprised,’ Blankstein said. “Depending on what side of the table you’re at, that’s either a pleasant or negative surprise. If you’re a seller, you’re pleasantly surprised. If you are a buyer, not so much. Either way, this rate environment caught a lot of people off guard.”

Overall, though? Blankstein said that 2019 has been a robust year for net lease activity. Investors are focusing on quality tenants and longer leases. They are also looking for assets that can withstand a possible recession or downturn in the market. This means that investors are focusing on casual-dining restaurants, quick-service restaurants, convenience stores such as 7-11 and dollar stores.

Less in favor are traditional big-box stores, which continue to struggle. Bigger retailers continue to search for the ideal floorplate size, Blankstein said. It’s clear that big retailers such as Target are experimenting, and finding success, with smaller-format stores. The challenge is that these retailers still haven’t found the perfect floorplate size.

Investors, then, are largely waiting to see how these experiments play out, Blankstein said.

There is no waiting on restaurants, though. Blankstein said that net lease investors are particularly fond of restaurant options today.

Blankstein points to Millennials as a big reason for this. These younger adults dine out a lot. That is providing a boost to quick-service restaurants like Chick-fil-A.

“The restaurant space is one where you are seeing a lot of new construction,” Blankstein said. “People want to invest in these newer spaces because they generally come with longer leases. They like the category. They like new construction. And they like longer-term leases. At the same time, anything ecommerce-resistant becomes attractive.”

Dollar stores, too, remain strong, though Blankstein said that the Dollar General chain is stronger than Family Dollar. Blankstein said that Dollar General has integrated more food-based products in its mix. That has attracted more business the chain’s way.

“In a lot of smaller towns, Dollar General has replaced more traditional convenience stores,” Blankstein said. “In more markets, Dollar General has become a quick convenience stop for people on their way home from work. It’s like how people in urban areas think of 7-11. You don’t need to stop in a big grocery store if you only need one or two items.”

Interested in even more conversation about the net lease market? Register for REjournals’ 5th annual Net Lease Summit here.